Securities are tradable financial instruments with some monetary value. They can take different forms, including stocks (equities), bonds, options, futures, and derivatives. They are bought and sold in various financial markets, such as stock exchanges and bond markets.
Securities can represent an ownership interest in, or a debt obligation of, an entity. They can also represent a right or obligation to buy or sell a specified asset at a predetermined price in future. Different types of securities have different characteristics and features, but they all serve to facilitate investment and manage risk.
What type of securities can you invest in?
Some of the more commonly encountered types of securities include:
- Stocks or shares: Equity securities, such as ASX shares, give an ownership interest in the underlying entity. This does not usually provide the security holder with the right to payments, but many ASX companies pay dividends to shareholders. Shareholders can also benefit from capital gains if the share price rises.
- Bonds: A debt security representing borrowed money, bonds must be repaid to security holders. Terms such as the interest (coupon) payments and maturity date are set, with debtors ranking ahead of shareholders in the event of insolvency.
- Options: This security type gives investors the right, but not the obligation, to buy or sell an underlying asset (such as stocks) at a predetermined price within a specific timeframe. Investors can use them for hedging or speculation purposes.
- Futures: There are agreements to buy or sell a specific asset (commodities, currencies, stock indexes) at a predetermined price and date in the future. They can be used to manage price risk for producers and consumers of commodities and also for speculative trading.
- Derivatives: Derivatives are financial instruments, the value of which is derived from an underlying asset, index, or reference rate. They include options, futures, swaps, and other complex financial products. Investors can use derivatives for risk management, speculation, or investment purposes.
Is a security the same as a share?
A share refers to a unit of ownership in a company or corporation. When you own shares in a company, you have a claim on its assets, earnings, and voting rights. Shares are also commonly known as stocks or equities.
'Security' is a broader term encompassing various financial instruments representing ownership or debt obligations. While shares are a type of security, there are other types of securities as well, such as bonds, options, futures, and derivatives. Securities can represent different financial instruments and investment vehicles with varying risk and liquidity profiles.
Should I start investing in securities?
Whether you should start investing in securities ultimately depends on your investment objectives and financial situation. Investing in securities can be an excellent way to build wealth, as the return on debt and equity securities is usually greater than the return on a bank deposit.
You will need to consider what types of securities best meet your needs and risk profile. Those unwilling to risk too much capital will likely prefer debt securities such as corporate bonds. People willing to risk capital in pursuit of higher returns may choose to invest in equity securities.
It's important to understand the relationship between risk and reward as investing in securities involves a trade-off between the potential for higher returns and the associated level of risk. By assessing your risk tolerance and researching different securities, you can make informed investment decisions that align with your financial goals and comfort level.
What are the pros and cons of investing in securities?
When considering the pros and cons of investing in securities, weighing the potential benefits against the inherent risks involved is essential.
Historically, the Australian share market has demonstrated long-term growth, serving as a means for investors to build their wealth steadily. However, it's crucial to acknowledge that share markets can also experience substantial declines, as witnessed during the onset of the coronavirus pandemic in 2020. During such market downturns, investors who hastily sell their shares may suffer significant financial losses.
On the positive side, investing in securities can act as a hedge against inflation, allowing investors to preserve the value of their wealth over time. Trading securities via the stock exchange is relatively straightforward, providing investors with liquidity and flexibility. Moreover, securities can offer additional income streams through dividends from shares or interest payments from bonds, as well as the potential for capital appreciation.
Nonetheless, it's essential to recognise the risks associated with investing in securities. Share market volatility can take an emotional toll on investors, especially during periods of market turbulence.
Successful investing also requires diligent research into the securities under consideration, as it is vital to understand the fundamentals and performance of the companies or entities behind them.